The auto industry is spending money and time to cope with Trump's ever-shifting trade policies, instead of becoming more competitive and innovative.

If the United States imposes 5% to 25% tariffs on all imports from Mexico starting Monday, U.S. consumers can expect to see sharp price increases on new cars and trucks as well as higher costs to maintain and repair their existing vehicles. The tariff move also endangers ratification of President Donald Trump’s signature trade agreement — the U.S.-Mexico-Canada Agreement — and sows uncertainty that puts a chill on investments in America.

The Center for Automotive Research, where I am a vice president, estimates that a 5% tariff rate would increase the price of an average new vehicle built in the United States by at least $250. At a 25% tariff rate, U.S.-built vehicle prices would rise at least $1,100. Vehicles imported from Mexico would see sharper price increases — at least $1,100 at 5% tariff rate and at least $5,400 if the tariffs were ratcheted up to 25% by this fall. Overall, the tariffs would reduce U.S. gross domestic product by at least $7 billion to $34 billionannually and cause the loss of 82,000 to 390,000 U.S. jobs.

CAR’s analysis is conservative in that it only counts parts as crossing the border one time. However, motor vehicle parts may cross the U.S.-Mexico border many times as they are built up to components and systems that automakers ultimately install in a vehicle on one side of the border or the other. CAR also did not model any retaliatory tariffs that Mexico may enact if the United States moved forward with tariffs.

The price, economic and employment impacts of the proposed U.S. tariffs on Mexico are likely to be significantly larger than CAR’s estimates.

Waiting in Tijuana, Mexico, to cross the border into San Diego on June 4, 2019.(Photo: David Maung/epa-EFE)

Studies have shown that U.S. producers and consumers bear the entire burden of paying for tariffs. For some vehicles — such as small or economy sedans that cannot be produced profitably in the United States — the addition of a 5% to 25% tariff could make it cost prohibitive to offer that vehicle for sale in the U.S. market. In those cases, U.S. consumer choice will be restricted, which puts further upward pressure on prices.

Mexico is the United States’ third largest overall goods and services trading partner,behind China and Canada — but in goods trade, Mexico ranks second. The vehicles and parts category makes up the largest share of Mexico’s imports to the United States.

In 2018, Mexico accounted for 27% of U.S. motor vehicle imports ($52.6 billion) and 37% of motor vehicle parts imports ($59.4 billion). Mexico is also a major destination of U.S. parts exports — accounting for 37% of U.S. parts exports in 2018 ($32.5 billion) and 6% of U.S. motor vehicle exports ($3.3 billion).

Investment slowdown amid trade uncertainty

Our CAR analysis of IHS Markit data shows that while 52% of all vehicles sold in the United States were U.S.-assembled, Mexico is the next largest source of U.S. vehicle sales — supplying 15% of vehicles sold in the United States last year. What’s more, automakers and suppliers have been building in Mexico since the 1920s, and the oldest auto assembly plant operating in Mexico was built in 1964.

Every automaker that makes vehicles in the United States relies on U.S.-Mexico trade as part of its supply chain, and tariffs on Mexico will disadvantage those automakers that assemble vehicles in the United States versus those that import vehicles and do not rely on Mexican content. Small U.S.-based suppliers will be hit especially hard because they cannot absorb the tariffs and do not have sufficient leverage to raise prices with their customers.

Since coming out of the recession in 2009, our research shows, domestic and international automakers have invested $131.2 billion in North American plants and facilities. While Mexico won more new auto assembly plants (nine) than the United States (four) in that period, the United States captured 75% of all automaker investments in North America between 2009 and the first quarter of this year.

Since 2015, however, the investment pace has slowed to about half what it was between 2009 and 2015. Uncertainty about the rules of trade might have something to do with the slowdown.

Trump policy shifts are s hurting automakers

If the administration would like even more investment and jobs in U.S. automotive and parts manufacturing, here is what would help:

►Pass a U.S.-Mexico-Canada Agreement that provides a stable environment for North American investments, raises the high-wage content required to achieve tariff preferences, and promotes enforceable labor reforms in Mexico.

►Enact a comprehensive manufacturing strategy to promote U.S. investment, including greater federal support for advanced research and development, expanded worker training programs, and more funding for programs like the Manufacturing Extension Partnership and the National Network for Manufacturing Innovation.

The administration’s ever shifting trade policies involving every major U.S. trading partner are creating a dead weight loss in the auto industry. Companies are spending time and money building up inventories, realigning their supply chains, hiring trade analysts and compliance specialists, and readjusting their corporate strategies. All of these efforts and dollars could be better spent by investing in people, manufacturing and R&D that would make U.S. automakers and suppliers even more innovative and globally competitive.

Kristin Dziczek is vice president for industry, labor and economics at the nonprofit Center for Automotive Research in Ann Arbor, Michigan. Follow her on Twitter: @kdziczek